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When do fiscal consolidations lead to consumption booms? Lessons from a laboratory experiment

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  • Geiger, Martin
  • Luhan, Wolfgang J.
  • Scharler, Johann

Abstract

According to the expectations channel, a fiscal consolidation may give rise to less contractionary, or even expansionary effects on consumption, despite a decline in current disposable income. Intuitively, people may accumulate a stock of savings in anticipation of the consolidation and may start to reduce their savings to support consumption once it occurs. We design a laboratory experiment to study the conditions under which the expectations channel operates. Our results indicate that fiscal contractions that occur in an unsustainable fiscal environment exert less contractionary effects on consumption, which supports the expectations channel. We also find that the expectations channel is more pronounced if the fiscal authority can convincingly commit to abstain from tax increases in the future, whereas increasing subjects׳ level of awareness by running a transparent policy has only little influence on the outcomes.

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  • Geiger, Martin & Luhan, Wolfgang J. & Scharler, Johann, 2016. "When do fiscal consolidations lead to consumption booms? Lessons from a laboratory experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 1-20.
    • Handle: RePEc:eee:dyncon:v:69:y:2016:i:c:p:1-20
    DOI: 10.1016/j.jedc.2016.05.003
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    Cited by:

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    3. Martin Geiger & Marios Zachariadis, 2019. "Assessing Expectations as a Monetary/Fiscal State-Dependent Phenomenon," University of Cyprus Working Papers in Economics 01-2019, University of Cyprus Department of Economics.
    4. Geiger, Martin & Zachariadis, Marios, 2022. "Consumers’ Updating, Policy Shocks, And Public Debt: An Empirical Assessment Of State Dependencies," Macroeconomic Dynamics, Cambridge University Press, vol. 26(8), pages 2104-2140, December.
    5. Luigi Mittone & Matteo Tomaselli, 2019. "Economic Growth and Public Debt: An Experimental Approach in Search of a Confidence Channel," DEM Working Papers 2019/18, Department of Economics and Management.
    6. Nicolae-Bogdan Ianc & Camelia Turcu, 2019. "So alike, yet so different: comparing fiscal multipliers across E(M)U candidates," Working Papers 2019.03, International Network for Economic Research - INFER.
    7. Lu, Kelin, 2022. "Overreaction to capital taxation in saving decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).

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    More about this item

    Keywords

    Expansionary fiscal consolidation; Expectations; Intertemporal choice; Experimental macroeconomics;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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